Chapter 11: Capacity, Reality of Consent, and Legality

Legal Capacity

For a contract to be considered valid and enforceable, the parties must have the legal ability to bind themselves to the agreement

• Incapacity is the exception, not the rule

Burden of proof (LC)

Burden of proof regarding incapacity falls on the party raising it as a defense to enforce the contract or as basis for rescission of the contract. It does not prevent the formation of a contract; it gives the incapacitated party a choice to ratify or disaffirm.

Minors (LC)

Most states have decided adult status occurs at 18 for almost all purposes.

• Some states allow for termination of infancy status upon marriage or emancipation.

• Emancipation: legal independence from one’s parents.

Minors: Disaffirmance/Rescission (LC)

• To protect minors in dealing with adults, minors can disaffirm (avoid) their contract.

• Except in specialized cases (Necessaries).

• The converse is not true; the adult ordinarily cannot avoid the contract.

• Business can require cosigner to protect itself.

Minors: Disaffirmance/Rescission- Duty of Restoration (LC)

Duty of Restoration:

• Upon disaffirmance the minor must return to the adult the property or other consideration that was the object of the contract.

• Public policies permitting minor to disaffirm are very Mistrong; adults should avoid contracting with minors

Minors: Ratification (LC)

Minor has indicated approval of the contract.

• Minor has indicated an intention to be bound by the provisions of the contract.

• Can either be express or implied.

Minors: Necessaries

• Things that directly foster minor’s well-being.

• Even if absence of ratification a minor will still be liable for transactions if the adult provided “necessaries.”

• Depends on a minor’s circumstances or social and economic situation in life.

• Based on quasi-contract.

Minors: Disaffirmance/Rescission Age (LC)

Misrepresentation of Age: most states allow the minor to disaffirm despite the misrepresentation.

Minors: Special Statues (LC)

Make minors liable in a variety of circumstances according to special statutes.

• Examples include:

  • Transportation by common carrier (Uber, Airline tickets).

  • Bank account contracts.

  • Insurance policies.

  • Educational loans.

  • Medical and dental expenses.

Insane persons (LC)

Lack the capacity to make a binding contract.

• Person must be so mentally infirm or deranged that understanding is lacking.

• Cause of disability is irrelevant.

Insane Persons: Effects of Transactions (LC)

Guardian has the legal capacity to contract.

• To disaffirm a contract, person must prove insanity at the time of contracting.

• To determine if transaction is void, voidable, or enforceable depends on facts.

• Contract is absolutely void if court adjudges insanity.

• Insane person who regains sanity may ratify contract made during period of insanity.

Insane Persons: Necessaries (LC)

• Law makes insane persons liable for necessaries in quasi contract.

• Fewer controversies arise regarding whether medical or legal services are necessaries.

Intoxicated Persons (LC)

• Validity of a contract depends on the degree of intoxication.

• If intoxication limits mental capacity of the individual, contract is voidable at the option of the intoxicated person.

• Formerly intoxicated person can then avoid or ratify the contract.

Immigration Status (LC)

• Residents, Non-immigrants, and Undocumented immigrants

• Citizens of a foreign country.

  • Depends on treaties between countries

  • Today, most can contract.

Enemy aliens

• persons from countries with whom we are officially at war.

  • Cannot enforce contracts.

Convicts (LC)

• Person convicted of a felony or treason has certain contractual disabilities.

• Disabilities applicable only during imprisonment.

Reality of Consent

The law has to ascertain whether consent given by parties is real.

Reality of consent is a prerequisite to form a contract.

Fraud: Elements (RoC)

• Misrepresentation of a material fact.

• Defendant knows statement is false.

• Intent to deceive (scienter).

• Plaintiff relied on the deception.

• Injury or detriment.

Fraud: Silence (RoC)

• At common law mere silence was not fraud

• No liability for fraud unless something was said or done

Misrepresentation (RoC)

• Similar to fraud, but does not require the elements of scienter and intent to deceive.

• Generally, plaintiffs allege both fraud and misrepresentation in same suit.

Mistake (RoC)

• Occurs when the parties are wrong about the existence or absence of a past or present fact that is material to their transaction.

• Parties must be wrong about material facts.

Mistake pt 2 (RoC)

• Legal mistake not synonymous with ignorance, inability, or inaccurate judgments relating to value or quality.

• Unilateral Mistake: only one party is mistaken about a material fact.

• Bilateral Mistake: both parties are in error about the essence of the agreement.

• Reformation: rewrite the contract to reflect the parties’ actual intentions.

Duress (RoC)

• Forced into contract against one’s will.

• Coercion must be so extreme that the victim lost all ability to assent freely and voluntarily to the transaction.

• Evidence of physical threats.

• Threats that cause intense mental anguish.

• Economic Duress

Undue Influence (RoC)

Use of a special relationship of trust and confidence to extract contractual or economic advantages.

Unconscionability (RoC)

• Manifestly unfair or inequitable.

• May justify a court’s subsequent intervention on behalf of the injured party.

Legality of Subject Matter

Any bargain that is criminal, tortious, or opposed to public policy is void due to illegality.

Usually a court merely leaves the parties where it finds them.

Mala in Se and Mala Prohibita(LoSM)

• Mala in Se: evil in itself (e.g., agreement to murder someone).

• Mala prohibita: forbidden by statute (more difficult to identify).

Agreements that Violate Statutes (LoSM)

Agreements that Violate Statutes.

• Price-fixing agreements.

• Performance of services without a license.

• Sunday closing laws: Prohibit the formation or performance of contracts on Sundays.

• Wagering statutes.

• Usury statutes: Limit the amount of interest that can be

charged on a loan.

Agreements that Violate Public Policy. (LoSM)

• Covenants Not to Compete: legal if legitimate business interest and reasonable in both time and geographic scope.

• Exculpatory clauses: limiting liability.

• Courts generally do not allow a party who has violated public policy to receive benefits from their wrongdoing.

Exceptions: Upholding Illegal Agreements (LoSM)

• Parties are NOT in pari delicto.

  • They are not equally at fault or equally wrong.

  • Licensed individuals.

• One party repents.

  • Bribery

• One party is justifiably ignorant.

  • Hire an unlicensed contractor.